The Federal Trade Commission is recommending that Web sites using paid search listings make their advertising practices and policies clearers to consumers -- or they could potentially face legal action.

Responding to a complaint filed a year ago by consumer advocacy group Commercial Alert, the FTC said it is contacting portals to outline the need for "clear and conspicuous" disclosure of paid placement in search results.

Heather Hippsley, acting associate director for the FTC's division of advertising practices, said in a public response to the Portland, Or.-based consumer group that policies regarding paid inclusion in search results also should be more clearly disclosed.

While the FTC declined to pursue action against the firms, "that determination should not be construed as a determination ... as to whether or not the practices described in the complaint violate the FTC Act or any other statute enforced by the Commission," Hippsley wrote in a separate letter to search engines and portals.

Commercial Alert, which was founded by longtime consumer advocate Ralph Nader, said last year that it believed a number of major portals and search engines were deceiving consumers by not adequately disclosing that their search engine results are paid ads. The complaint specifically named AltaVista, AOL Time Warner , Direct Hit Technologies, iWon, LookSmart , Microsoft and Terra Lycos .

AltaVista, which said it has yet to receive the FTC's letter, said it believed its policies -- which include citing paid listings as "Products and Services" -- were sufficient.

"We believe that the paid listings that we display on our site are delineated from our search results and that the disclosure is not misleading," said Fred Bullock, chief marketing officer at the Palo Alto, Calif.-based search engine, which is owned by CMGI . "If and when we do receive such a letter, we will take it very seriously and review its recommendations carefully. We will then respond accordingly."

Several other firms have already made changes in recent months that would seem to satisfy the FTC and Commercial Alert. AOL, which outsources paid listings to Google, recently made the term "Sponsored Links" the standard throughout its properties, replacing "Partner Search Results" on its Netscape.com portal. Commercial Alert has said that it approves of "Sponsored Links" as a clear indication of paid listings.

Meanwhile, Terra Lycos also some months ago changed its labels to "Sponsored Search Listings," in response to both the Commercial Alert complaint and to independent focus group testing.

"We thought it was a better user experience overall," said Tom Wilde, the firm's general manager of search services, who also noted that it has yet to receive the FTC's letter. "We've really gone out to clearly label what we're doing here ... And [the new labeling] has another benefit, in that they're highly relevant for a number of queries, like e-commerce queries. If anything, they actually enhanced them for people."

Ask Jeeves, which previously operated Direct Hit but earlier this year folded it into recently acquired Teoma, said it, too, has failed to receive the FTC's letter thus far. Teoma uses "Sponsored Results" to indicate its paid listings.

"Once we get it, we'll look into the specifics of what they have to say," said Ask Jeeves Chief Marketing Officer Heather Staples. "We'll take very seriously what they have to say in the evolution of both sites, Ask Jeeves and Teoma."

Spokespeople from the other firms named in the complaint did not return requests for comment by press time.

While the FTC held off on pursuing action, Hippsley said the agency is aiming to affect a change in the behavior of the entire search engine industry, rather than just the firms named in the complaint. The agency's staff, she said, "for the most part ... believes that while many search engine companies do attempt some disclosure of paid placement, their current disclosures may not be sufficiently clear."

She added that the staff believes the terminology often used to differentiate paid listings -- such as "Products and Services," "Featured Listings," and "Partner Search Results" -- is ambiguous, and ought to be relabeled.

Hippsley also suggested that failing to adequately disclose paid placements within search results is similar to making ads in other media appear like editorial content -- and is similarly damaging to consumers.

That fact ultimately could prove the linchpin of future FTC action against search engines and Web portals that don't change their policies: in the past, the agency has filed actions against infomercial and magazine advertisers for failing to properly indicate that their ads were, in fact, paid content.

The move comes following an April study by Consumer Reports publisher Consumers Union, which found that 60 percent of U.S. Internet users were unaware that some search engines accepted payment to list certain sites more prominently than others. Eighty percent of the respondents said that it is important for a search engine to disclose such matters.